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Promoting “1 Completeness, 2 Connects” of the Derivatives Market, Building A High-quality Iron & Steel Eco-chain

Date:20 December 2019
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The 8th Iron & Steel Raw Materials Market Summit is held in Beijing on December 14. It is hosted by China Metallurgical Industry Planning and Research Institute (MPI) and co-organized by Dalian Commodity Exchange (DCE). DCE Vice President Zhu Lihong says at the Summit that iron ore is the first product realizing “1 completeness, 2 connects” in China, and the iron ore futures price has increasing international influence. In this context, how to correctly use futures, options and other derivatives instruments has been an unavoidable topic.

Zhu Lihong points out that iron and steel is the pillar industry for the national economic development. Currently, China’s economy has shifted from the stage of rapid growth to the stage of high-quality development and the Chinese iron and steel industry has been at the critical stage of shifting from growth in number to high-quality development. And building a coordinated, green and win-win upstream and downstream eco-chain has been the key to promoting the high-quality development of the iron and steel industry.

To adapt to the demand of the high-quality development of the iron and steel industry, DCE has successively listed metallurgical coke, coking coal, iron ore futures and kept diversifying the risk management products and instruments at the iron and steel raw materials end. And it has made continuous innovation in iron ore products, such as ushering in overseas traders in May 2018, rolling out the swaps platform in the end of December 2018, and listing the basis trading platform in September this year. The listing of iron ore options on December 9 has made iron ore become the first product in China complete with futures, options and swaps and connect the spot and futures markets as well as the domestic and overseas markets.

After years of cultivation, DCE’s iron and steel raw materials derivatives section has made remarkable progress, with its market operation quality and industry service capacity kept increasing. From January to November of 2019, the average daily trading volume of iron ore, metallurgical coke and coking coal futures of DCE were 1.24 million contracts, 230,000 contracts and 97,000 contracts respectively, amounting to the spot goods of 124 million tonnes, 23 million tonnes and 5.82 million tonnes; corporate clients’  open interests of these futures take up more than 50% of the total; and the futures-spot price correlation of iron ore has maintained at above 0.95, and its hedging efficiency exceeded 85%. The coking coal, metallurgical coke and iron ore futures have been the essential risk management instruments for the operation and production of many spot enterprises. According to available statistics, about 110 steel mills, over 1,300 trading companies and some 10 miners have taken part in iron ore futures trading. Zhu Lihong says that during the sharp increase of raw materials price in the first half of this year, some iron and steel enterprises made use of the futures price which was much lower than the spot price and the futures market’s low rate of capital employed. They managed to increase the hedging amount of locked-in long-term orders and regularly build and buy hedging positions in the futures market by expanding the hedging proportion, thus effectively avoiding the risk of raw materials price increase and increasing their profits by over 45% against the market.

Zhu Lihong stresses that China’s iron and steel industry has made remarkable achievements in cutting overcapacity, reducing cost and increasing efficiency, which has laid a good basis for its high-quality development. However, due to the current complicated domestic and overseas macro economy trend, the downward economic situation, and the intensified environmental protection policies, China’s iron and steel industry has encountered increasing uncertain risks. For iron and steel enterprises, the industrial competition has expanded from the traditional spot goods field of manufacturing, selling and trading to e-commerce and the derivatives market. Thinking about how to correctly use the derivatives instruments like futures and options has been an unavoidable topic for every enterprise. She believes that the iron and steel industry is similar to the soybean industry. As the soybean industry has been geared to the international market earlier, the whole industry has higher risk management awareness and level, and over 90% of the enterprises have made use of futures, options, the floor-traded market and the over-the-counter market to do hedging, which, together with the spot trading mode like basis trading, has contributed to the stable production and operation of the soybean industry. And the industry has managed to handle the impact of the financial crisis in 2008 and the Sino-US trade dispute this year. The iron and steel industry can draw from its experience.

Disclaimer: This English translation may be used for reference only. In cases there is any discrepancy between the English version and the original Chinese version, the original Chinese version shall prevail. Dalian Commodity Exchange may change or update this English translation without any prior notice and shall accept no responsibility or liability for damage or loss caused by any error, inaccuracy, misunderstanding, or change with regard to this English translation.

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